AUSTRALIAN OIL AND GAS CORPORATION LIMITED v BRIDGE

Court of Appeal (NSW)|1988-11-29|Before: Reversing Brownie J, Gleeson CJ, Clarke JA, Kirby P

AUSTRALIAN OIL AND GAS CORPORATION LIMITED v BRIDGE OIL LIMITED

GLEESON CJ, CLARKE JA AND KIRBY P 28, 29 November 1988, 12 April 1989

CONTRACT - petroleum lease - net profits interest reserved by appellant - payments made to appellant by respondents as successors to parties to original agreement - whether payments made in accordance with contractual obligations - whether payments made in accordance with fiduciary obligations - respondents to make two disputed deductions from the payments to appellant - deductions include allowance for processing of petroleum product and transport thereof - processing and transport charges include profit element - whether properly deducted from "net profits interest" payable to appellant

CONTRACT - joint venture - contractual relationship - whether also fiduciary relationship - relationship between contractual and fiduciary duties considered by the members of the Court Hospital Products Limited v United States Surgical Corporation and Ors (1984-85) 156 CLR 41, 70, 96 and Bromley London Borough Council vy Greater London Council [1983] 1 AC 768 considered.

PETROLEUM AND MINERALS - petroleum exploration licence agreement to farm out exploration - reservation of "net profits interest" - meaning of expression

proper approach to calculation of - whether profits of processing and transport may be included in deductions - whether fiduciary duty between joint venturers in the circumstances.

WORDS AND PHRASES - "net profits interest". Petroleum Act 1923-1983 (Qld) Property Law Act 1974-1978 (Qld) Petroleum Regulations (Land) 1966 (Qld)

(Reversing Brownie J) (1) "Net profits interest" is a phrase which does not have a precise meaning. It depends upon the construction of the particular agreement in question. Christy v Petroleum Resources Corp 691 P 2d 59; 102 NM 58 (1984) applies; (2) The method of calculating the net profits adopted by the respondents was incorrect; (3) The evidence before the Court of Appeal was insufficient to permit it to determine the correct figures; (4) The proceedings should be returned to the Commercial Division for a determination of the contractual duties of the respondents to the appellant to be reconsidered in the light of the reasons of the Court and the evidence including any further evidence called; (5) (per Gleeson CJ and Clarke JA) The appellants alternative argument that there was a fiduciary relationship between the parties which prevented the making of the deduction in question was incorrect Hospital Products Limited v United States Surgical Corporation and Ors (1984-85) 156 CLR 41 applies. (6) (per Kirby P) It was unnecessary and inappropriate to determine that issue at this stage.

Gleeson CJ and Clarke JA On 29 October 1959 the appellant agreed to assign its interest in a number of petroleum exploration licenses covering land in New South Wales and an authority to prospect number 57P ("ATP 57P") issued by the Government of the State of Queensland and covering approximately 43,000 square miles of land to Union Oil Development Corporation ("Union") and Kern County Land Company ('Kern') as tenants in common in equal shares subject to the reservation of a "twenty per cent net profits interest" in its favour.

At that time oil had not been discovered in Australia. The discovery of the first commercial oil field, which became known as Moonie No 1 Well, took place in December 1961. A short time later, on 9 October 1962, there was executed a formal transfer agreement whereby the appellant transferred its interest in ATP 57P to Union and Kern as tenants in common in equal shares subject to the reservation of an interest in 20 per cent of the net profits described in the agreement. The clause describing the net profit interest relevantly provided as follows:

"The 'Queensland Reserved Interest' shall consist of the right to receive Twenty per cent (20%) of the 'net profits' derived from all operations carried on under the Permits. Transferees agree from time to time in accordance with the provisions in that behalf hereinafter provided to account to the Transferor for the said Queensland Reserved Interest.

(a) The term 'proceeds of production' as used herein means the proceeds actually received by Transferees from the sale of oil, gas and other substances produced under the Permits. In the case of production which is shipped abroad or taken into refinery operations in Australia prior to sale by Transferees, the proceeds of such production shall be determined by using the fair market value thereof at the point where it is so shipped abroad or taken into refinery operations.

(b) The term 'chargeable expenditures' as used herein includes all direct costs, charges and expenses incurred in and all indirect costs, charges and expenses properly allocated to the exploration, development and operation of lands subject to the Permits, the treatment, transportation to point of sale (or point where "proceeds of production" are determined) and marketing of production therefrom and any matters or things in any way appertaining to any of the foregoing, all governmental fees, charges, rents and royalties on account of the Permits or production resulting therefrom and all taxes paid on account of such operations or production (exclusive of general corporate or income taxes)..."

On 13 November 1968 ATP 57P was cancelled and replaced by a new authority to prospect number 145P ("ATP 145P"), which covered 18000 square miles and was issued to Union and Kern in respect of that portion of the land previously covered by ATP 57P. Later still Tenneco Australia Inc ("Tenneco") acquired Kern's interest in the new ATP.

On 20 May 1969 Union and Tenneco entered into a farmout agreement with Bridge Oil NL ("Bridge'') in respect of the portion of the land contained within ATP 145P. There were 162 square miles in this portion which became known as the Noona Block. By this agreement Union and Tenneco agreed to assign to Bridge an undivided SO per cent share of their interest in the Noona Block in consideration of Bridge carrying out exploration works on the block at its sole cost and expense. The reservation of the appellant's net profit interest was acknowledged.

Later, on 1 August 1969, Union and Tenneco on the one hand and Bridge on the other entered into a more comprehensive agreement (the Noona Operating Agreement) which set out the terms on which Bridge's exploration operations were to be conducted. The appellant was not named as a party in the agreement but acknowledged by its execution of the document that it was joining in the agreement. It should be observed that it was necessary that the appellant participate in the agreement for the reason that while its net profit interest was recognised in it, CL1(12) redefined the interest. The new definition provided:

URIBTRALIAN OIL AND GAS CORPORATION LIMITED v BRIDGE OIL LIMITED (Gleeso& CJ and Clarke JA)

"Tn lieu of such above-mentioned 20% net profits Reserved Interest, as to such areas described in Exhibit 'A' hereto in which BRIDGE earns an assignment of an interest under this Agreement the Parties shall substitute therefor the 'Net Profits' accruing to BRIDGE, Union and Tenneco from operations carried on under this Agreement, Net Profits under this Agreement as at any given date over all 'chargeable expenditures' from the date of this Agreement to such given date. The definitions of the terms 'proceeds of production' and 'chargeable expenditures' shall be the same as the definitions set forth in the Agreement between AOG, Union and Tenneco dated October 9, 1962, but limited to proceeds realized from and chargeable expenditures incurred in connection with operations carried on under this Agreement, and it is further agreed that since Union and Tenneco will be giving up to BRIDGE a 50% working interest and that proceeds of production to which such 50% working interest would otherwise be entitled, any amounts received by BRIDGE shall not be considered 'proceeds of production' of Union and Tenneco but one-half of all expenditures borne by BRIDGE to earn such 50% working interest shall be considered 'chargeable expenditures' of Union and Tenneco to the same extent as if actually spent by them and it is also agreed that Government subsidies shall not be credited against 'chargeable expenditures'of Union and Tenneco unless actually received and retained by them. Net profits shall be computed separately for Bridge, Union and Tenneco upon their Participating Interest at that time.

However, in the event that BRIDGE shall not earn any interest in the Joint Area as provided in CL4 hereof, any expenditures borne by BRIDGE in such a non-earning effort shall be considered, in the entire amount so expended, as the 'chargeable expenditures' of Union and Tenneco to the same extent as if actually spent by them, but only for the purpose of determining 'net profits' derived exclusively from those areas described in Exhibit 'A' hereto and the substituted 'net profits' agreement and aforementioned shall mutatis mutandis apply."

On 14 February 1970 Bridge agreed with Union and Tenneco to farm into another portion of the land contained within ATP 145P. This portion contained approximately 81 square miles and became known as the Wunger Block. On the same date these parties entered into an operating agreement in terms relevantly identical with the Noona Operating Agreement. Once again the appellant, although not named as a party in the agreement, joined in it by executing the document. Because the relevant terms of the two agreements are substantially the same it is appropriate to refer only to the Noona Operating Agreement in the consideration of the issues which have arisen. As a result of the terms of the operating agreements and a number of assignments of interest, which it is unnecessary to mention in detail, the first two respondents succeeded to the joint venture interests held by Union and Tenneco in respect of the Noona Block and the three respondents succeeded to those interests in respect of the Wunger Block.

Both the Noona and Wunger Blocks are in the south western part of the State of Queensland lying roughly one hundred kilometres south of the town of Wallumbilla which is in turn approximately forty kilometres east of Roma. At the times that the operating agreements were entered into hydrocarbons were being recovered from areas, other than the Noona and Wunger Blocks, within the area which was or had been covered by ATP 145P. The only oil pipeline then in existence and capable of transporting any oil discovered within the Noona and

Wunger Blocks to Brisbane ran from Moonie, which is situated more than ninety kilometres from those two blocks, and was known as the Moonie to Brisbane Pipeline.

Natural gas was first discovered in commercial quantities in the Wunger Block in a field known as the Boxleigh Gas Field on a date in 1970 after the execution of the Wunger Operating Agreement and in the Noona Block in the Silver Springs Field in 1974. At all relevant times the closest gas pipeline, which had been constructed in 1968, commenced at a point south of Wallumbilla known as ML-1A which was nearly one hundred kilometres north of the two blocks.

Following the discovery of hydrocarbons in these two fields a separation plan was constructed in the Silver Springs Field in the Noona Block in 1978 and at the same time a pipeline running from that plant to ML-1A and a trunkline between the Boxleigh field and the separation plant were constructed. In 1985 the joint venturers constructed an LPG extraction and fractionation plant known as the Wungoona Plant in close proximity to ML-1A, an LPG pipeline which extended between the plant and Wallumbilla and an Elgas LPG storage and loading plant at Wallumbilla. In the same year the Moonie to Brisbane pipeline was extended from Moonie, which lies slightly south and about one hundred kilometres east of the Noona and Wunger Blocks, west to Jackson which lies at a point westward of those two blocks.

In the Boxleigh Field three productive wells have been discovered and two of these are still in operation. The gas which is collected from these wells moves along flow lines which converge at a manifold within the Wunger Block near Boxleigh No 1 well and about two and a half kilometres from the common boundary of the Wunger and Noona Blocks. At that manifold the flow from all or any of the Boxleigh flowlines can be turned off. On the downstream side of the manifold the Boxleigh trunkline carries the hydrocarbons from the wells to the Silver Springs plant.

There are five-productive wells in the Silver Springs field from which there are flowlines for the movement of the hydrocarbons to a manifold at the inlet of the Silver Springs plant. At that manifold it is possible to turn off the flow from all or any of the flowlines. The plant contains equipment which separates condensate and water from the hydrocarbons. There are separate separation facilities for the hydrocarbons produced by the Boxleigh Field and for those produced by the Silver Springs Field. Once separation has occurred the condensate from each field is stored in tanks reserved for that particular field. The condensate is then periodically taken by truck from the storage tanks to various destinations. Substantially the whole of it has, however, been shipped to Moonie where in early years of the operation of the plant it was sold to the third respondent. In later years it has been mixed with other crude oil at Moonie into a 'cocktail' and then moved to Brisbane via the Moonie-Brisbane pipeline. In Brisbane it is placed in storage and then sold. In earlier times a small proportion of condensate was transported to the Maranoa Oil Refinery at Roma and there sold. That refinery has since closed down. In order to transport the condensate from the separation plant to the various destinations the respondents have engaged independent trucking companies and borne the cost of transportation in proportion to their respective interests in the condensate being transported.

In 1985 natural gas was discovered in a field known as the Sirrah Field in part of the Noona Block. In order to move the hydrocarbons from the production wells to the separation plant a Sirrah trunkline was constructed. These hydrocarbons, after an initial separation, measurement and reuniting of the

URIBTRALIAN OIL AND GAS CORPORATION LIMITED v BRIDGE OIL LIMITED (GleesoB CJ and Clarke JA)

condensates, are combined with the hydrocarbons from the Silver Springs Field downstream from the Silver Springs manifold but upstream of the separators used in respect of the Noona Block production. Once the separation has been effected at the Silver Springs separation plant the hydrocarbons, which remain after the extraction of the water and condensate, from each field are combined and flow north alone the pipeline. Originally the destination was ML-1A but since the construction of the Wungoona LPG extraction and fractionation plant they are piped to that plant where butane and propane are separated out. The remaining hydrocarbons are then transported along the pipeline to ML-1A which is the point at which sale of the natural gas is effected by the respondents. The propane and butane are then piped along the LPG pipeline to Wallumbilla where they are then sold and trucked out in LPG gas trucks. In summary the hydrocarbons are taken by way of trunklines from the points of production to the Silver Springs separation plant. Water and condensate is separated out at that plant and the condensate is trucked by independent contractors to Moonie where it is dispatched along the pipeline to Brisbane and sold. The remaining hydrocarbons are then piped to the Wungoona LPG extraction and fractionation plant where butane and propane are separated out. The gas left after the removal of butane and propane proceeds along the gas pipeline to ML-1A where it is sold prior to being piped to Brisbane. The butane and propane produced are transported along the LPG pipeline to Wallumbilla where they are then stored and sold.

It is also pertinent to observe that while the Silver Springs separation plant and the Sirrah and Boxleigh trunklines are situated wholly within the boundaries of the Noona and Wunger Blocks the Wungoona LPG extraction and fractionation plant, the LPG pipeline to Wallumbilla and most of the main pipeline to ML-1A, are situated outside the boundaries of those blocks.

Reference has already been made to the fact that the joint venturers constructed the Wungoona Plant. That statement requires elaboration. What occurred was as follows. On 17 February 1984 the respondents executed a joint venture agreement which was expressed to take effect from 20 October 1983 pursuant to which a joint venture was set up to take over the operation of the existing plant, pipelines and facilities and to construct the Wungoona LPG plant. At the same time a previous joint venture agreement under which the Silver Springs Plant and pipeline had been constructed and operated was terminated. Following the execution of that agreement the LPG Plant and associated pipelines and facilities were constructed and all facilities have been operated by the joint venture then set up.

The dispute which has arisen between the parties concerns the amount properly payable to the appellant in respect of its net profits reserved interest which, it is agreed, has been reduced to 10 per cent. In the accounts which the respondents have submitted to the appellant, and inpursuance of which they have paid moneys to the appellant, they have shown two deductions which are said by the appellant to be improper. In each case the amount concerned is 86 cents per thousand cubic feet (or, as described by the documentation, 86 cents per mcf). The first deduction is claimed as a tariff for piping the hydrocarbons from the Silver Springs plant to ML-1A or the LPG Plant and the further charge of 86 cents mef is claimed in respect of the processing of the hydrocarbons at the various plants.

The appellant contends that the respondents are entitled under the operating agreements to deduct only "actual" costs, charges and expenses. They are not permitted under the terms of the agreements to deduct charges which include a profit to themselves in respect of the use of the pipeline facility and the processing of the hydrocarbons. It was common ground that the respondents were entitled to deduct from the actual proceeds received upon the sale of hydrocarbons the cost of processing and transporting them to their points of sale. The dispute relates to the basis of calculation of such costs.

While the respondents recognised that 86 cents mcf was in each case a figure which had been calculated, in accordance with forecasts of expected production, for the purpose of ascertaining a wellhead value of the hydrocarbons in order to determine the royalties properly payable to the Queensland Government, they claimed that they were properly deducted as, in effect, the cost of the use of the respondents' facilities for transportation and processing.

The dispute came on for hearing before Brownie J who was asked by the parties to determine questions of principle only. The parties agreed that if any question arose as to the amount of any cost properly called into account that question should be referred to arbitration.

Brownie J resolved the issue of construction in the respondent's favour and made the following declaration: "The Court declares that: 1. On the true construction of each of the agreement dated Ist August 1969 expressed to be made between Union Oil Development Corporation, Tenneco Australia Inc and Bridge Oil NL, and the agreement dated 14th February 1970 expressed to be made between Union Oil Development Corporation, Tenneco Australia Inc, and Bridge Oil No Liability, and in the circumstances that:

(a) Petroleum within the meaning of each of those agreements has been discovered in the Joint Area (within the meaning of the first mentioned agreement) and the Wunger Block (within the meaning of the second mentioned agreement).

(b) That Petroleum has been sold at a point outside the boundaries of the Joint Area and Wunger Block.

(c) Prior to sale, certain of the said petroleum has been transported to the point of sale, by a pipeline known as the Silver Springs Pipeline and processed by plants known as the Silver Springs Facility and the Wungoona LPG plant.

(d) Each of the said pipeline, Silver Springs Facilities and Wungoona LPG plant are and at all material times have been owned and operated by the defendants pursuant to certain joint venture agreements.

THEN for the purpose of ascertaining the amount of net profits payable to the plaintiff pursuant to each of the said agreements the defendants are entitled to deduct from the proceeds actually received by them upon sale of the said petroleum a reasonable charge (including a reasonable profit margin) for the said transportation and processing of the petroleum."

The effect of that declaration is to be understood in the light of what the parties identified as the issues of principle between them. The debate was, in essence, about the processing and transportation fees, each of 86 cents per mcf. The appellant claimed that the making of those charges, which were not limited to costs and expenses incurred by the respondents, and were in effect claimed as a fee by the respondents for carrying on the activities of transportation and processing, and which it was agreed included a significant element of profit, constituted an inappropriate way in which to calculate "net profits". That claim

URIBTRALIAN OIL AND GAS CORPORATION LIMITED v BRIDGE OIL LIMITED (Gleesoa CJ and Clarke JA)

was rejected by his Honour although he left open the issue of the reasonableness of the fee including the reasonableness of the profit.

The primary issue between the parties, the resolution of which turns upon the true construction of the Operating Agreements relating to the Noona Block and the Wunger Block respectively, may be summarised as follows. (As was said above, it is convenient to concentrate on the Noona agreement). The "net profits interest" to which the appellant is entitled was originally reserved in 1962 at a time when the area the subject of the interest was approximately 43,000 square miles. What became known as the Noona Block was a much smaller portion of that original area. The appellant's "reserved interest" was stated, in the instrument of 1962, to:

"Consist of the right to receive twenty percent (20%) of the 'net profits' derived from all operations carried on under the Permits". The expression "Permits" was defined to mean, in effect, the mining titles from time to time relating to the original area. When in 1969 Bridge Oil NL entered into an Operating Agreement in relation to the Noona Block, under which it became entitled to earn an interest in the Block, the appellant's "reserved interest" was dealt with by a verbal formula which has been set out above. That formula identified the appellant's entitlement as being a right to receive twenty percent (20%) of the net its accruing from operations carried on under the Operating Agreement of 1969 relating to the Noona Block. That agreement in turn defined the scope of the operations being carried on under the agreement as limited to certain kinds of activities within the Noona Block. In other words, the original "reserved interest" was defined in the 1962 document by reference to profits derived from all operations carried on over the original wider area, whereas the 1969 Agreement identified the reserved interest by reference to operations carried on under the 1969 Agreement which were, in turn, defined more narrowly. In the events that occurred, petroleum in the form of wet gas was produced and recovered within the Noona Block. What was sold by the Participating Companies was not petroleum in the form in which it was recovered at the well-head. The gas was the subject both of processing activities, some of which occurred within the Block and some of which occurred at considerable distance outside the Block, and of pipeline transportation both within and away from the Block prior to sale. The processing of the petroleum gave rise to what was appropriately described in argument as an element of "betterment". The hydrocarbons which were sold by the participating companies, following upon processing and transportation, consisted of condensate, propane and butane (LPG) and methane and ethane (Natural Gas).

As has been noted, it was common ground between the parties that, in calculating the "net profits" in which the appellant is entitled to share, both the proceeds of sale of the hydrocarbons referred to above and the costs involved in transportation and processing were relevant. The dispute was as to how they should be ascertained. The appellant's argument was that the net profits were to be calculated on the basis that the gross receipts for the hydrocarbons constituted "proceeds of production" as defined and that the relevant "chargeable expenditures" included the actual costs and expenses of and incident to transportation and processing up to point of sale. The respondents contended, and the learned judge held, that the activities of transportation and processing (or at least such of those activities as occurred outside the Block - a possible qualification which, if the appellants approach be rejected, would require further consideration) did not constitute operations carried on under the Noona

Operating Agreement and that therefore the calculation contended for by the appellants was inappropriate. Rather, it was argued and held, the operations of transportation and processing which were carried on under the separate joint venture agreements earlier referred to, were to be charged for, not directly as "chargeable expenditures" as defined, but as activities for which a "reasonable fee" including a profit element could be charged.

From one point of view the issue may be expressed as being whether the appellants have a net profits interest in the profits of all the activities relating to petroleum recovered from the Noona Block up to the point of sale of the hydrocarbons, or whether the activities in the profits of which they are entitled to share stops short of that at some point so that the respondent can charge a fee for the further activities against the proceeds of sale of the hydrocarbons being a fee that goes beyond "chargeable expenses" as defined and in effect treats those further activities as profit-making activities of the respondent in which the appellant has no interest.

We are of the opinion that, upon what we have described as the primary issue, the construction of the agreement for which the appellant contends is to be preferred to that accepted by the learned judge.

The problem really has two aspects, and they may be considered separately, even though they overlap.

First, there is what might be called the geographical aspect of the matter. We do not consider that the mere circumstance that expenditure is incurred in respect of activities which take place outside the boundaries of the Noona Block produces the consequence that it does not fall within the meaning of the expression "chargeable expenditures" as defined. When regard is had to the definitions of "proceeds of production" and "chargeable expenditures" in the agreement of 9 October 1962, which are included by reference into the relevant provisions of the Operating Agreement in relation to the Noona Block, it is clear that the parties provided that costs and expenses of various kinds relating to activities which might occur outside the geographical area the subject of specific reference (which was itself much more extensive than the Noona Block) could constitute "chargeable expenditures". For example, expenses properly allocated to "marketing of production" are included in the definition. Similarly, expenses properly allocated to "transportation to point of sale" are included. There is nothing to suggest that the point of sale would necessarily or even probably be within the relevant area. On the contrary, the definition of "proceeds of production" plainly contemplates that a sale might take place outside that area. Again, costs of 'treatment' of the relevant petroleum (which both parties before us agreed would include processing of gas) constitute "chargeable expenditures" and there is nothing in the definition to suggest that that is only so where the treatment occurs within the confines of the relevant area.

It is argued, however, that because sub-clause (12) of CL1 of the Operating Agreement of 1969 specifically limits "chargeable expenditures" to "expenditures incurred in connection with operations carried on under this agreement", and because of the geographical limitation of the operations carried on under the Agreement, then expenditures in respect of transportation and processing outside the boundaries of the Noona Block do not constitute "chargeable expenditures" as defined. There is, it is true, an element of tension between the reference to the definition of "chargeable expenditures" in the agreement of 1962, which contains no geographic limitation, and the words of limitation contained in sub-clause (12) of CL1 of the 1969 Agreement. However,

URIBTRALIAN OIL AND GAS CORPORATION LIMITED v BRIDGE OIL LIMITED (Gleeso@ CJ and Clarke JA)

it seems to us that the apparent tension largely disappears when regard is had to the reason for the presence in the 1969 agreement of the words of limitation. They are, in our view, not aimed at cutting down the rights of the appellant. Rather, they are aimed at ensuring that the activities in respect of which Bridge Oil NL and the participating companies would incur an obligation to the appellant, and by reference to which the calculation of "net profits", involving deducting "chargeable expenditures" from "proceeds of production", would be made were limited by reference to hydrocarbons produced and recovered from the narrower area the subject of the 1969 Agreement and expenditures incurred in connection with those hydrocarbons.

The point becomes clearer when it is remembered that the operations carried on under the 1969 Operating Agreement by the participating companies do not include sale of the hydrocarbons produced and recovered within the Noona Block. Prima facie, under the Agreement, the entitlement of the Participating Companies is simply to take in kind their respective shares of the hydrocarbons and then to deal with them, if they choose, individually. In the events that happened they chose to deal with them collectively in the manner already described. The first factor, however, in the calculation of the entitlement of the appellant is the proceeds of sale of the hydrocarbons as and where ultimately sold, subject only to the qualifications contained in par (a) of the definition of "proceeds of production" in the 1962 Agreement. The express reference to costs of transportation to point of sale, and cost of marketing, in the definition of "chargeable expenditures" are not, in our view, inconsistent with the limitation to which reference has been made, when one bears in mind the purpose of that limitation. Furthermore, the words "in connection with" are clearly wide enough to comprehend costs incurred up to the point of sale of the hydrocarbons produced and recovered within the Noona Block.

The more difficult aspect of the problem relates to the subject referred to as "betterment". The hydrocarbons which are actually sold by the Participating Companies have had value added, not only by reason of transportation, but also by reason of processing or treatment. That processing involves not only removal of water but also separation and removal of liquids. The products which are ultimately the subject of sale are partly the result of processing or treatment and that processing or treatment does not constitute an operation carried on under the 1969 Operating Agreement. Rather, the relevant operations are carried on under separate joint venture agreements. Moreover, the definition of "proceeds of production" refers to "oil, gas and other substances produced under the Permits".

Once again, in our opinion, the answer lies in a consideration of the whole of the terms of the definitions of "proceeds of production" and "chargeable expenditures" in the 1962 Agreement, incorporated by reference in the 1969 Agreement, and an understanding of the purpose of the limitation contained in the 1969 Agreement.

In one respect the subject of "betterment" is specifically addressed in the 1962 Agreement. In the second sentence of the paragraph which defines the term "proceeds of production" reference is made to the possibility that petroleum produced from the relevant area will be "taken into refinery operations", so that the hydrocarbons, in the form in which they are ultimately sold, will have been made the subject of refining processes. In that event the fair market value of the petroleum at the point when it is taken into refinery operations is to be taken to be the "proceeds of production". However, the reference to "treatment" in the definition of "chargeable expenditures" makes it plain that the parties

contemplated that various other forms of betterment, adding value to the petroleum, might occur before sale. Mere transportation would of itself frequently add value by bringing the hydrocarbons closer to the market. The parties specifically provided for the possibility that treatment of hydrocarbons might occur in-between their recovery from the well and their ultimate sale. That, of course, is exactly what happened in the present case. There is nothing in the definition of "proceeds of production" which affects the requirement that, in such circumstances, the proceeds actually received from the sale of such hydrocarbons are to be taken as the "proceeds of production".

We are of the view that, in the events that have occurred, the amounts actually received by the participating companies from sales of condensate, LPG and natural gas constitute "proceeds of production" for the purpose of the calculation of the net profits in respect of which the appellant is entitled to share. Further, we are of the view that all the direct costs, charges and expenses incurred in, and all indirect costs, charges and expenses properly allocated to, the processing or treatment of the hydrocarbons in question and their transportation to point of sale constitute "chargeable expenditures" for the same purpose.

It follows that the manner in which the net profits in which the appellant is entitled to share have been calculated in the past, which proceeds on a different basis from that which we regard as appropriate, is incorrect. As previously indicated, we were informed that, as a matter of fact, the tariffs about which the appellant complains were set and applied for the purpose of making calculations in respect of the statutory royalties payable to the Queensland Government. Those royalties, it is to be noted, are based upon the value of the hydrocarbons at the well-head. We can understand that, in calculating well-head value of the raw gas, upon which the royalty is to be computed, elements of betterment resulting from the downstream operations are to be excluded. We make no comment upon the question whether the calculations that are in fact made are an appropriate way of producing that result. We do observe, however, that a very different result may be produced where the object of the exercise is, not to calculate well-head value for the purpose of a Government royalty, but to apply the contractual formula for working out the appellant's net profits interest. As appears from Christy v Petrol Resources Corp 691 P 2d 59 the concept of a "net profit interest', although well known to United States Oil and Gas Law, does not have a precise meaning and the nature and scope of such an interest always depends upon the true construction of the instruments by which it is created. (See Sherrille "Net Profits Interests - A Current View" lgth Oil and Gas Institute at 165 and William and Meyers Oil and Gas Law at 424.1. Interestingly, the very problem in the present case seems to be that referred to in a footnote at 202 of Mr Sherrille's Article).

Accordingly we consider that the method of calculation of net profits which has been adopted by the respondents for the purpose of determining the appellant's interest, and which (subject to the factual issue of reasonableness) has been affirmed by his Honour, is incorrect.

There was not sufficient information or argument before us to enable us to conclude what the correct figures should be. Even accepting, as we do, the appellant's primary submission, there is still room for a good deal of argument about the calculation of "chargeable expenses". For example, should an allowance be made for the cost of debt and equity capital involved in the transportation and processing operations in question? In a context such as this, what exactly is the "profit", as distinct from properly deductible costs, which is

URIBTRALIAN OIL AND GAS CORPORATION LIMITED v BRIDGE OIL LIMITED (Gleeson CJ and Clarke JA)

to be excluded? It is to be remembered that, to an extent, references to "profit" may be question begging. It is only after properly chargeable costs are identified and quantified that one can tell whether, and to what extent, there is a "profit" involved.

For the above reasons we would allow the appeal and remit the matter to. Brownie J for further consideration in accordance with those reasons.

We should refer, in conclusion, to an alternative basis upon which the appellant argued that the respondents were not entitled to charge a fee for processing and transportation which involved the in making a profit at the appellant's expense. (In this context, also, the concept of "profit" would have required closer scrutiny if the argument had been valid). The argument was that there was, in the circumstances, a fiduciary relationship between the parties which was inconsistent with the possibility of profit. Brownie J rejected the submission that such a relationship existed, and we are in agreement with his Honour's conclusions in this regard. This was a commercial arrangement of a kind that is not uncommon, entered into between parties who negotiated at arms length and defined their respective financial rights and obligations carefully (even if not with absolute clarity) in a written agreement (Hospital Products Ltd v United States Surgical Corporation 156 CLR 41 at 70 per Gibbs CJ, and 142-3 per Dawson J; cf United Dominions Corporation Ltd v Brian Pty Ltd 157 CLR 1). The dispute between the parties concerns those financial rights and obligations and is to be resolved by reference to the contract which they made. If the Court were to strain to superimpose fiduciary notions in a case such as this it would defeat, rather than give effect to, the legitimate expectations of commercial people. It may be noted that the weight of authority in the United States in the area of oil and gas laws appears to be against a conclusion that the relationship in the present case is fiduciary, although such authority would recognise obligations of prudence and good faith on the part of the respondents (See, for example Craig v Champlin Petroleum Company 435 F 2d 933; Tidelands Royalty "B" Corporation v Gulf Oil Corporation (1986) 804 F 2d 1344).

The particular matters which require further consideration and decision at first instance in the light of our views as to the meaning and effect of the relevant contractual provisions are not such as might alter our opinion on this particular issue. We have read in draft form the judgment of Kirby P and do not agree that the course of argument in this Court makes it inappropriate to offer a concluded opinion on the issue. In argument before this Court Senior Counsel for the appellant was asked, during the course of his argument in chief, whether he desired to add anything to what appeared in his comprehensive written submissions on the point and he said that at that stage he did not. He returned to the issue in reply and said: "We rely on our written submissions in respect of fiduciary obligations. The Court, therefore, heard and read all such argument on the point as counsel who raised it desired to advance. Accordingly, this issue forms no part of the reasons for which we make any of the orders proposed.

We would allow the appeal and set aside the declarations and orders of Brownie J. We would order the respondents to pay the appellant's costs of the appeal and of the proceedings before Brownie J to date. The respondents should, if qualified, have a Suitors Fund Certificate in respect of the costs of the appeal. We would remit the matter to the Commercial Division for further consideration in the light of the above reasons. Although we make no order in this regard we

would indicate that, subject to the requirements of the other business of the Commercial Division it would seem appropriate that the further hearing of the matter should be before Brownie J.

Kirby P I concur in the orders proposed by Gleeson CJ and Clarke JA, on the construction of the agreements between the parties to this appeal. I am generally content with the reasons which they have given to explain how the approach adopted by the respondents has been in error, how the construction offered by Brownie J requires revision and why this Court cannot, on the present evidence, determine the net profits in which the appellant is entitled to share. I therefore agree that the matter must go back to the Commercial Division to have further consideration in the light of the matters to which their Honours have referred.

In the course which the argument of the appeal took, the appellant was entitled to succeed upon the construction of the relevant agreements. Accordingly, it was not necessary for this Court to hear full oral argument on the alternative basis upon which the appellant claimed an entitlement to succeed. This was, putting it shortly, that for the respondents to charge a fee for processing and transportation of the petroleum product, which fee involved their making a profit at the appellant's expense, would involve, in the circumstances, a breach of an obligation, fiduciary in character, owed by the respondents to the appellant.

The Court did have written submissions upon which the appellant relied. But full oral debate of this contention was not heard by the court. It is therefore inappropriate, in my view, to offer any concluded opinion upon the issue. However, as the matter will now be returned to the Commercial Division and as at the re-hearing, the appellant may wish to press its argument, I wish to add a few comments about it. They provide an additional reason for me to join in the rders proposed by Gleeson CJ and Clarke JA.

The expanding scope of fiduciary duties Parties who are associated in a commercial contract will normally be taken to have negotiated its terms at arm's length. They are not, as such, within the usual categories of established fiduciary relationships. In the present case, a relationship of trust was specifically denied. But that denial does not exclude other relationships, in which a fiduciary duty might arise. The fact that a relationship does not fall within one of the familiar categories from which fiduciary duties will be inferred to arise does not terminate the consideration by a court of the argument that a fiduciary duty exists in the circumstances. The scope for extending the categories of fiduciary relationships is shown by many recent cases. Bromley London Borough Council v Greater London Council and Anor [1983] 1 AC 768 is a good example. In that case it was held that the Greater London Council owed a fiduciary duty to its ratepayers and that it was in breach of that duty in failing to balance fairly the interests of the rate payers (on the one hand) and transport users (on the other), and in casting an inordinate burden on the rate payers by levying a supplementary rate to subsidise public transport costs. This result would have seemed surprising to earlier generations of judges and writers on equitable doctrine. But it simply illustrates the fecundity of equitable principle.

It must be acknowledged that there are dangers in unduly extending the duties derived from earlier fiduciary relationships into commercial dealings between parties such as the participants in the agreements the subject of this litigation. In relationships such as theirs, there are strong reasons of legal policy for the courts' holding the parties strictly and only to the terms which, in law, they entered or which the law will attribute to them. Those reasons suggest that they should not

UWRISTRALIAN OILAND GAS CORPORATION LIMITED v BRIDGE OIL LIMITED (Kirby RB

normally be encumbered by superimposed obligations of an equitable character. Proliferated, such obligations could introduce disturbing elements of uncertainty which the law could do well to avoid.

On the other hand, a joint venture is a particular and increasingly familiar form of relationship between business parties. Corporations or individuals who enter such joint ventures normally do so upon the basis of a proposed association, the main features of which are typically defined in a written agreement. Yet, above and beyond the terms of the written agreement will necessarily be a wide range of activities and relationships which are in general contemplation and which the parties cannot predict in their entirety. They therefore cannot be covered exhaustively in the initiating written agreement. The very association of a joint venture will normally imply the acceptance of an ongoing relationship between the parties which is envisaged to be one of contractual harmony. At least at the outset of their relationship - and before disputes bring them to lawyers and before courts or arbitrators - the parties normally contemplate a harmonious and co-operative relationship of mutual advantage. How does the law reflect this usual expectation? The legal duty of co-operation and implied terms Clearly it may do so by importing implied terms under which, by law, one contracting party will be obliged to co-operate with another to the full extent envisaged by the nature of their relationship. In Butt v M'Donald (1896) 7 QLJ 68-70-71, Griffith CJ, then in the Supreme Court of Queensland, said: "It is a general rule applicable to every contract that each party agrees, by implication, to do all such things as are necessary on his part to enable the other party to have the benefit of the contract."

The same obligations had earlier been expressed by Lord Blackburn in Mackay v Dick (1881) 6 App Cas 251, 263: "As a general rule... where in a written contract it appears that both parties have agreed that something should be done, which cannot effectually be done unless both concur in doing it, the construction of the contract is that each agrees to do all that is necessary to be done on his part for the carrying out of that thing, though there may be no express words to that effect." The limits of the scope of the legal duty of co-operation were explored by Mason J in Secured Income Real Estate (Australia) Limited v St Martin's Investments Pty Limited (1979) 144 CLR 596 at 607.

Considerations of legal history, equitable principle and the practical desirability of certainty in commercial contracts have combined to discourage the development of a counterpart equitable doctrine for imposing fiduciary duties at least upon contracting parties in a commercial arrangement negotiated at arm's length. If the parties to such agreements do not see fit to impose clear duties on each other, the courts have generally felt disinclined to substitute their notions of commercial morality for those hammered out in the marketplace by negotiating business people. Gibbs CJ lists some of the cases which evidence this disinclination in Australia, England and in Canada in his judgment in Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41 at 70. That authority, together with the reasons which I have mentioned, suggest that the argument by the appellant that a fiduciary duty arose in the present circumstances runs into formidable difficulties.

On the other hand, the terms of a joint venture agreement may sometimes give rise to equitable duties of a fiduciary character. The appellant pointed, in this connection, to the decision of Bryson J in Noranda Australia Limited v Lachlan Resources NL and Ors, unreported, SC 29 July 1988. The respondents for their part pointed out that a specific clause in the joint venture in that case strongly

influenced Bryson J's decision. Clause 7.8 (as shown on p25 of his Honour's reasons for judgment) provided that each party would "do all things necessary to discharge all of the obligations and duties under the agreement in a bona fide manner... to the intent that the relationship between the parties shall be fiduciary". There was certainly no equivalent to that clause in the agreements in the present case.

But can an equivalent relationship be spelt out of the other terms of the agreements and of the very nature of the association between these parties? Would equity remain silent (quite apart from any remedy or answer which the law might provide) if, say, one joint venturer were to "cream off" to its own advantage profits which might reasonably have been expected to have been part of the "net profits interest" of the other joint venturer? There is no settled common law definition of "net profits interest", at least in the United States where the phrase is one of comparatively common use in petroleum contracts. The phrase takes it meaning, in each case, from the true construction of the agreement in which it appears. See JN Sheeral Jr, "Net Profits Interest - A Current View" in 19 Oil and Gas Institute Law, 166.

Yet it seems unlikely that the respondents could avoid an accepted obligation to pay "net profits interest" to the appellant by the simple expedient of interposing a corporation, controlled by them, in the processing and transport of the petroleum. Were they by this device to "cream off' a substantial amount of the "net profits interest" which would otherwise be payable to the appellant, this would invite a response from the courts protective of the appellant. It might be a response (as Brownie J proposed) that imports into any permissible processing and transport charge an implied term that any profit component of such charge should be "reasonable". Or it might be a limit imposed by equity because of the relationship which existed between the appellant and the respondents requiring that the latter should not abuse the relationship by seeking to derive from it additional benefits which are incompatible with "net profits interest" in a way which offends conscience.

The importance of defining the contractual relationship first To some extent equity and common law are seeking to achieve the same objective. This is to require that parties to a contract should act bona fide to fulfil the terms and objectives of the contract. See discussion P D Finn, "Equity and Contract" in P D Finn (Ed) Essays on Contract, Law Book Co, Sydney, 1987, 104, 105ff. The possible coexistence of contractual and fiduciary relationships, and the duties which derive from them, have been noted in many cases. For some commentators it is an "evil offence" to suggest that there has been, or should be, even a partial fusion of common law and equitable doctrine. See eg RP Meagher, WMC Gummow and JRF Lehane, Equity: Doctrines and Remedies (2nd ed), Law Book Co, Sydney, 1984, para 221. But others are not so sure and Finn, at least, suggests that there are relevant "unities". See ibid, 108f.

In Hospital Products (above) at 97, Mason J explained a reason for the primacy of the contractual obligations: "That contractual and fiduciary relationships may coexist between the same parties has never been doubted. Indeed, the existence of a basic contractual relationship has, in many situations, provided the foundation for the erection of a fiduciary relationship. In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them. The fiduciary relationship cannot be

UWRISTRALIAN OILAND GAS CORPORATION LIMITED v BRIDGE OIL LIMITED (Kirby RB

superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction." These words made it vital to define clearly and accurately the legal obligations of the parties under the relevant agreements. They suggest that, in the circumstances of this case and as between these parties, the fiduciary relationship (if any) will be of secondary importance. In my opinion, the existence of such a relationship cannot entirely be ruled out at least at this stage of the argument. As the United States authorities (cited by the Chief Justice and Clarke JA) show, in that country obligations of good faith on the part of contractual parties such as the respondents have been enforced. See also Meinhard v Salmon et al 164 NE 545 (1928) and Midcon Oil and Gas Limited v New British Dominion Company Ltd and Anor [1958] SCR 315. But the beginning of the determination of the obligations of the respondents to the appellant is the precise definition of the terms of the contractual terms accepted by them. Only when these are clear may the terms of any fiduciary relationship (which accommodates itself and conforms to the terms of the contract) be determined.

It is for that reason also that it is appropriate to return the matter to the Commercial Division for further consideration in the light of this Court's reasons.

The appeal is allowed and the declarations and orders of Brownie J are set aside. The respondents are to pay the appellant's costs of the appeal and of the proceedings before Brownie J to date. The respondents should, if qualified, have a Suitors Fund Certificate in respect of the costs of the appeal. The matter is remitted to the Commercial Division for further consideration in the light of the above reasons. Although no order is made in this regard the court indicates that, subject to the requirements of the other business of the Commercial Division it would seem appropriate that the further hearing of the matter should be before Brownie J.

Counsel for the Appellant: PR Graham QC and RH Macready Solicitors for the Appellant: Westgarth Baldwick Counsel for the Respondent: RP Meagher QC and P Hallen

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